Bonds rise as market adjusts to Fed policy outlook

U.S. Treasuries prices rose on Friday as investors adjusted to the idea that the Federal Reserve was unlikely to tighten monetary policy until the economy looked more robust.

A modest pullback in stocks also supported safe-haven U.S. debt. Bonds edged higher after a brief period of volatility that ensued immediately after the Fed decided on Wednesday against trimming its large-scale asset purchases, confounding market expectations of a reduction.

Treasuries rallied on that news on Wednesday and some profit-taking on that rally followed on Thursday. Prices headed higher again on Friday though gains were modest.

"The Fed is telling people rates don't need to move higher until the economy has time to prove itself. Whether that's at the end of this year or next year remains to be seen," said Jonathan Mackay, executive director and senior fixed income strategist at Morgan Stanley Wealth Management in New York.

Mackay said he expected the 10-year yield to remain at the lower end of a 2.5 percent to 3.25 percent range, near 2.70 percent to 2.90 percent, until yearend.

St. Louis President James Bullard said on Friday that the Fed could still scale back its massive bond-buying campaign at its next meeting, at the end of October, if the data was strong enough, noting that September's decision not to taper was tight.

Low inflation, however, remains a risk for the U.S. economy, Bullard added, saying that he wants to see more evidence of rising inflation before scaling back purchases.

On Friday, benchmark 10-year notes rose 6/32 in price as their yields stood at 2.735 percent from 2.761 percent late on Thursday.